Woodside acquiring $2.7b stake in Israel's Leviathan gas field

3/27/2014

Woodside acquiring $2.7b stake in Israel's Leviathan gas field

BY ERAN AZRAN and AVI BAR-ELI

JERUSALEM (Haaretz) -- Partner companies that own the Leviathan gas field announced that they have signed an amended memo of understanding with Woodside Energy, bringing it into the partnership. Woodside will hold about 25% of the rights to Leviathan in exchange for payments and royalty commitments amounting to roughly $2.71 billion.

The Leviathan field, which contains roughly 19 Tcf of natural gas, is the largest gas field to have been discovered in the past decade. It was discovered in 2010, about a year after the discovery of the Tamar field, which, together with Tamar Southwest reservoir, contains roughly 11 Tcf of natural gas. The Leviathan reservoir is expected to be the largest infrastructure project in Israel’s history.

Woodside, Australia’s largest independent oil and gas company, specializes in liquefied natural gas. It will be installing a liquefaction plant (either on land or offshore) and ship LNG by sea.

With Woodside’s entry into the partnership, the percentage of holdings of each of the partners will change. Delek Drilling and Avner Oil and Gas, which are part of Yitzhak Tshuva’s Delek Group, will hold roughly 16.93% each of the rights to Leviathan field. Noble Energy will hold roughly 30%, Woodside will hold about 25 % and Ratio Oil Exploration, which is controlled by the Rotlevi and Landau families, will hold about 11.12%. The Leviathan field gains a value of roughly $10.8 billion from Woodside joining the partnership, as compared with the figure of $8.3 billion that was discussed in the previous round of talks in December 2012.

Woodside will pay about $2.71 billion for its stake in Leviathan. The first payment, of $850 million, will be paid in cash upon the closing of the transaction. The second payment, of $350 million, will be transferred only when the decision is made to construct the liquefaction plant or upon the export of non-liquefied natural gas from Leviathan. The third payment, of up to $1.3 billion, will be made upon the future production of natural gas for export. The amount, which comprises 5.75% of Woodside’s revenue for the sale of natural gas, is dependent on minimum production of two trillion cubic feet of natural gas from the well.

Besides these payments, the partners in Leviathan will benefit from additional discoveries of natural-gas reserves or crude oil. If the natural-gas reserves should increase beyond 20 Tcf, the partners will receive an additional $50 million from Woodside. If crude oil should be discovered in the reservoir’s bottom layers, Woodside will pay the partners royalties of 2.5% of the revenue from the sale of the crude oil. Woodside and the other partners agreed to hold talks in Woodside’s absence to complete the binding agreement by March 27.

In December 2012, the partners signed a preliminary agreement in principle with Woodside to sell it a 30% stake in Leviathan. Woodside promised to pay roughly $1.25 billion for partnership in Leviathan, based on a valuation of Leviathan at roughly $5 billion. In addition, Woodside agreed to bear the various costs, which were expected to reach up to about $250 million, including the cost of exploratory drilling for crude oil. The final sum that Woodside was to pay could have climbed to $2.5 billion, depending on future natural-gas prices throughout the world, among other things. The agreement raised Leviathan’s potential value to roughly $8.3 billion.

Since the preliminary agreement was signed, geopolitical changes have taken place that allowed the partners in Leviathan to demand a higher price from Woodside. The major change was the resumption of diplomatic relations between Israel and Turkey, which could allow for the export of cheap natural gas to Turkey via an undersea pipeline. At the same time, an analysis of the findings of exploratory drilling in Leviathan increased the natural-gas reserves by roughly 2 Tcf as compared with the preliminary estimate.

The new agreement has raised the immediate payment the partners are receiving to about $1.2 billion — a significant improvement over the previous agreement — as Woodside’s share in the reservoir has fallen to 25% instead of 30%. Unlike the previous agreement, most of the payment to the partners is assured, and is not conditional on changes in global natural-gas prices or other variables.